Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit

The strategy known as "upstream planning" is gaining popularity among wealthy individuals seeking to mitigate taxes on appreciated assets. Instead of transferring these assets to their children, they transfer them to their parents. This approach allows the assets to be absorbed into the parents' wealth, avoiding capital gains taxes through a step-up in cost basis upon inheritance. Pamela Lucina, chief fiduciary officer at Northern Trust in Chicago, highlights the importance of ensuring that this strategy aligns with individual circumstances due to its benefits and potential drawbacks. Key considerations include the size of both generations' estates and whether they have utilized their estate and gift tax exemptions.

The current estate and gift tax exemption is at a record-high of $13.1 million per person or $26.2 million per couple. However, this exemption is set to decrease to around $7 million at the end of next year unless Congress intervenes. This creates a sense of urgency for those considering upstream appreciated gifts. The strategy works best when the parents' estate is smaller than the children's and they haven't used their exemption. Risks include potential estate-tax burdens for parents once the exemption drops and the possibility of creditors claiming the assets if the parents are in debt. Additionally, gifting assets outright means losing control over them, with the risk of parents bequeathing them to someone else.

Health and timing are critical factors in upstream planning. If parents die within a year of receiving the appreciated assets, the step-up in cost basis is lost. The strategy was successfully implemented by one of Lucina's clients, an only child with a strong relationship with their parents. Publicly traded securities are the most common assets transferred due to their market-established value. However, transferring real estate is less common because of existing tax benefits for primary residences. To mitigate risks, using a trust can ensure assets are more likely to be returned to the original giver, though they may still be subject to the parents' creditors. Lucina underscores the importance of open communication in optimizing family wealth through estate planning.

For more information see Karen Hube "Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit", Penta, July 2, 2024.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.